Global Investment Perspective
IN THIS ISSUE Highlights
Investor sentiment improved in December
1 Highlights
due to a combination of further encouraging
3 Short-term Investment economic data and the formalised rescue
Outlook package for Ireland. In the US, positive
economic releases helped to strengthen
6 Long-term Investment market confidence. US manufacturing activity
Outlook improved, with 11 out of 18 industries
reporting expansion in December, while the
7 Macro Assessment ISM Manufacturing index climbed, returning to
levels seen in 2005.
10 Equity Markets
The ¯85 billion rescue package for Ireland
12 Fixed Income was finalised, which somewhat helped
to ease fears of sovereign debt default
14 Currency and Other
and eurozone monetary stability. The Irish
Investments government passed a new ¯15 billion fiscal
consolidation plan, which paved the way for
the European Union and International Monetary
Fund loans to be released.
However, Ireland’s debt rating was
downgraded by both rating agencies, Fitch
and Moody’s. The reasons cited were due
to the combination of the fiscal costs of
restructuring and supporting the banking
system as well as inherent risks to the
country’s economic outlook. In addition,
tension grew around Spain, amid the
country’s sharp deterioration in industrial
output growth and rising unemployment
during November.
In emerging markets, despite promising
economic growth, investors started to
focus on accelerating inflation. As such, China
tightened its monetary policy by raising the
bank reserve requirement ratio for the sixth
time and on Christmas day it increased both
the deposit and lending rates to anchor down
inflation expectations.
December Market Recap
Developed and emerging market equities
recorded positive returns in December as the
rescue package for Ireland helped to soothe
investor concerns of contagion and the
improvement in economic data supported the
recovery story. The MSCI World Index rose
by 7.2%, while emerging market equities, as
represented by the MSCI Emerging Markets
Index, increased by 7.0%.
However, individual emerging market
countries had substantially varying degrees
of returns. For instance, on the back of
strong growth data, Russian equities rose
by a notable 8.2% whereas Chinese equities
dipped by 0.6%.
Within fixed income, US treasuries declined
by 1.7% in December, posting the largest
monthly loss for the asset class since
December 2009. But for the year as a
whole, US government bonds returned a
positive 5.8%. During the month, investor
sentiment was shaken as the US monthly
budget statement showed a deficit of
US$150.4 billion in November, above both
the reading in October and the consensus
forecast. Meanwhile, the US total public
debt outstanding stood at a record US$14.0
trillion on 31 December 2010. Reinforcing this
concern, Moody’s gave a moderate warning
over the scale of US borrowing in the long-
term.
1
Global Investment Perspective

Outlook & Strategy

While the global economic recovery is making progress, conditions remain challenging and growth uncertainties
persist. Therefore, our central scenario remains unchanged. Overall, we anticipate positive, albeit moderate,
sub-trend economic growth in developed economies going into 2011. Furthermore, we also expect ongoing
strength in emerging economies. Our main concern here is the prospect of further monetary tightening, which
would impact global growth prospects, given that emerging economies have been an important engine behind
the global economic recovery to date.

In the developed world, the key risks on the economic horizon remain fiscal tightening and weak consumption.
The prospects for labour markets and consumption remain unclear, despite some signs of stabilisation.
Unemployment rates are still elevated and consumers are still endeavouring to unwind debt positions,
particularly in the US and the UK.

At an asset class level, we have a neutral view on equities relative to cash on the basis that earnings forecasts
for 2011 are reasonable, stock valuations look undemanding, not least relative to cash and government debt,
and central banks continue to provide liquidity support. In early November, the US Federal Reserve announced
plans to buy US$600 billion worth of government bonds by mid-2011. Collectively, these factors create a
supportive backdrop for equities in general although balanced by the negative impact of the slow-down in
global growth.

At the sector level, while valuations remain attractive for healthcare and telecommunications stocks on an
absolute basis, the valuation gap relative to other sectors is less compelling. Therefore, we no longer have a
relative preference for these two sectors.

Within the context of developed markets equity, we have a preference for Japanese equities where we
maintain a tactical short-term overweight position. The Japanese equity market lagged other developed
equity markets for much of 2010 and, having recently started to outperform, is likely to have positive price
momentum. There are also early signs that flows are becoming more supportive. Japanese stock valuations
look attractive relative to history both in absolute terms and relative to other developed markets.

Overall, we remain neutral on emerging markets equities. Within this universe, we continue to favour Russia as
we view stock valuations as attractive on a relative and absolute basis.

In fixed income, with inflation under control in the developed world with the exception of the UK, we believe
central banks are likely to keep interest rates low, which is broadly supportive for fixed income markets.
Within the fixed income universe, our preference continues to focus on developed market corporate bonds,
particularly non investment grade (‘high yield’) which we believe offer value on a total-return basis. Conversely,
US treasury and eurozone sovereign bond valuations do not appear particularly attractive despite the recent
rise in yields, nor do they offer much protection in the event that inflation begins to surprise on the upside. From
a valuation perspective, emerging market debt remains less attractive than high yield and other corporate debt.
Therefore, we have a negative stance on US dollar-denominated emerging market sovereign debt relative to
developed market corporate debt. Furthermore, we also have a slightly negative view on global developed
inflation-linked bonds, largely because inflation in the developed world is currently muted. High unemployment
and the compression in salaries, as well as ongoing risks to a sustainable recovery, are still weighing on
consumer demand, thus helping to keep prices under control.

2
Short-term Investment
Outlook (6 - 12 months)

CURRENT
ASSET CLASS REASONING
VIEW
• Equity valuations relative to cash and especially government debt remain
Global Developed Market
Neutral attractive, plus liquidity remains supportive. There continue to be risks to the
Equity
economic recovery, but our core scenario is for positive, but sub-trend growth.
• Whilst unemployment remains elevated at 9.6%, Fed policy has remained
US Equity Neutral
accommodative and recent economic news-flow has been encouraging.
• Economic conditions remain mixed. UK growth has slowed, austerity
measures are in the process of being rolled out in parts of Europe and the
economic health of peripheral eurozone countries remains uncertain. That
Europe Equity
Neutral said, interest rates and inflation remain generally low (the UK being an
(including the UK)
outlier), the Bank of England has flagged the possibility of a further round of
quantitative easing, and recent corporate earnings news in Europe has been
encouraging.
• We have a tactical, short-term preference for Japanese equities as they lagged
other developed equity markets for much of 2010 and, having recently started to
Japan Equity Positive outperform, are likely to have positive price momentum. There are also early signs
that flows are becoming more supportive. Japanese stock valuations look attractive
relative to history both in absolute terms and relative to other developed markets.
• From a macroeconomic perspective, the outlook remains generally positive with
strength in both the manufacturing and consumer sectors. However, from a
EQUITY Asia ex-Japan Equity Neutral
valuation perspective, market prices have largely reflected the positive news-
flow.
• Emerging countries are likely to continue to lead the recovery due to robust
domestic consumption and strong intra-regional trade. That said, like developed
Global Emerging Markets Neutral
markets, emerging market equities are exposed to volatility stemming from the
question marks around the sustainability of the global economic recovery.
• The economic performance of Latin American countries remains strong and
earnings growth estimates for 2011 look reasonable. Having said that, the
Latin America Equity Neutral
good news seems to be well reflected in market prices and relative valuation
measures show no strong signals. We, therefore, retain our neutral stance.
• Economic data from the region has been highly encouraging and 2010-2011
forecasts are positive. In addition, valuations remain reasonable. Key risks include
Middle East Equity Neutral
a slowdown in global demand for oil and the potential deterioration of budget
deficits among some of the countries in the region.
• Manufacturing data has varied within the different countries. Weak labour
markets, high levels of government debt and ongoing concerns about eurozone
Eastern Europe Equity Neutral debts are weighing on the outlook for the broader region. However, at a
country level, we favour Russian equities. Valuations for Russian equities are
attractive in both absolute and relative terms.

3
Short-term Investment
Outlook (6 - 12 months)

• Excess capacity in developed markets and the renewed commitment of key

central banks to remain accommodative are generally supportive for low yields.
US Government Bonds Negative However, despite the recent rise in yields, the market is still offering little value
relative to history and, downside risks remain. Within fixed income, we prefer to
own corporate debt, where we see greater total return opportunities.
• We have a negative stance on eurozone government bonds relative to
cash. This is due to uncertainties regarding the economic health of eurozone
Euro Government Bonds Negative
peripheral countries. In addition, valuations of these bonds do not look particularly
attractive; they offer very limited protection against negative surprises.
• Strong corporate earnings results, the view that major central banks will keep
Investment Grade interest rates low and strong demand for yield have boosted investment grade
Positive
FIXED INCOME Corporate corporate bonds. With momentum likely to remain positive, we continue to be
positive on the asset class.
• High yield bonds continue to look attractive on a total return basis. We have
retained our positive view on the asset class given better-than-expected
High Yield Positive corporate results, declining default rates and growing expectations that interest
rates could remain anchored at their current low levels due to growing global
economic growth uncertainties.
Sovereign US dollar- • Sovereign US dollar-denominated emerging market debt continues to look less
denominated Emerging Negative attractive on valuation grounds than developed market corporate debt, and high
Markets Debt yield in particular.
Global Developed • On a relative basis, global inflation-linked bonds appear less expensive,
Negative
Inflation-linked Bonds particularly in view of the considerable sell-off in sovereign bonds.
Between the
• We expect the oil price to fluctuate in the US$70-US$90 range, as improved
range of US$70
Oil demand is balanced out by a forecast rise in OPEC production. Fluctuation in
to US$90 per
risk-appetite is likely to contribute to oil price volatility.
barrel
Neutral • We are neutral on gold now as opposed to having been somewhat negative in
Between previous months. Moves by the US Federal Reserve to add further liquidity to
the range of markets, combined with ongoing macroeconomic uncertainty, remain supportive
Gold
OTHER US$1,250 to factors for this precious metal. Against this backdrop, we expect gold will trade
INVESTMENTS US$1,400 per in a between a range of US$1,250 to US$1,400 per troy ounce in the near-
troy ounce term.
• High unemployment, falling occupancy rates and declining rental values in the
US and Europe warrant a cautious/ negative outlook for these two markets in
Commercial Real Estate general. Our short-term outlook for the UK has deteriorated, with weaker rental
Neutral
(unlisted markets) and capital growth projections, although we are not expecting a significant price
correction as yields remain above our view of long run fair value. The outlook
for Asia Pacific is improving, although there is wide regional divergence.
Euro, British pound • Valuation indicators are not sending any clear signals at present. We see both
CURRENCY sterling, Japanese yen Neutral event-driven and sentiment-driven risks contributing to ongoing volatility. We
and the US dollar thus continue to have a neutral view on currency exposures.

4
Short-term Investment
Outlook (6 - 12 months)

Summary

Overall, we are neutral on equities relative to cash. Within

equities, we have closed out our preference for healthcare,
telecommunications and consumer staples stocks as the valuation
gap relative to other sectors has converged making these sectors
less attractive on a relative basis. Within the context of developed
markets equity, we remain positive on Japan on a short-term
perspective partly due to attractive stock valuations and positive
price momentum and flows. Within emerging markets equity, our
favoured market is still Russia.

In fixed income, we have a negative view on government bonds

relative to cash, although less so than last month. However, we
have a positive stance on corporate debt – both investment grade
and high yield. Positives for corporate bonds include attractive
valuations and favourable issuer fundamentals. Our central
economic scenario is for slow but positive growth in the major
developed markets, a backdrop which is typically positive for credit
markets.

With regard to the four major developed market currencies, it is

likely that heightened volatility will continue. Valuation measures
are not currently providing strong signals and we therefore, have a
neutral stance on currency positions.

5
Long-term Investment
Outlook (3 - 5 years)

ASSET CLASS CURRENT VIEW REASONING

• Average rate of growth somewhat subdued in the developed world.

Yet a combination of exposure to higher growth areas like emerging
Developed Market Equity Positive
markets and dividend growth are likely to keep average nominal rates at
high single digit levels.

• Expected to outperform developed market equities thanks to a

Emerging Market Equity Positive
favourable structural backdrop.

• Comparatively low level of yield and issues around public debt are likely
Developed Market Government Bonds Negative
to keep average returns relatively subdued.

• The level of spread continues to be attractive on a historical basis and

Developed Markets Credit Positive is likely to keep average returns for credit assets above respective
government bonds.

• The level of spread continues to be attractive on a historical basis and

High Yield Positive is likely to keep average returns for credit assets above respective
government bonds.

• Structural improvements and reasonable valuation levels are likely to

Emerging Market Debt Positive lead to an outperformance of emerging market debt relative to cash and
developed market sovereign debt.

• Inflation expectations are likely to remain contained over the medium-

Developed Market Inflation-Linked Bonds Neutral / Negative
term due to subdued growth in developed markets.

• Growth in emerging markets likely to remain an element of support for

Commodities Positive
this asset class.
• Subdued economic growth and stimulus measures are likely to keep
Developed Market Cash Rates Negative
rates at subdued levels for the foreseeable future.

6
Macro Assessment
While the economic news-flow was generally encouraging, the risks from sovereign debt issues in developed economies
and monetary tightening in emerging economies remain present.
US
There were positive readings in business and consumer activity, but
labour data still disappointed.
• The ISM Manufacturing index rose in line with the consensus
forecast, at 57.0 in December, back to the levels seen in 2005.
Furthermore, the University of Michigan Confidence Index rose
above the forecasted consensus during December, to 74.2,
while retail sales grew strongly, by 0.8% month-on-month in
November.
• However, labour data was particularly disappointing in
December. Non-farm payrolls were well below consensus
expectations at 39,000 in November compared to 172,000 a
month earlier. November unemployment remained elevated at
9.8%, while weekly jobless claims figures gave mixed signals
throughout the month.
• Of additional importance, concerns over the indebtedness of
the US government were more prevalent. The monthly budget
statement showed a deficit of US$150.4 billion in November,
above both the reading in October and the consensus forecast.
• Also, while the extension of the Bush-era tax cuts is likely to
have a positive effect on consumption (all other things being
equal), it is also expected to hurt US public finances. Reinforcing
the concern, Moody’s gave a moderate warning over the scale
of US borrowing in the long-term.
Europe ex-UK
The broad economic picture is sound, but the situation at the country
level is still a concern.
• As a whole, the eurozone economy grew by 1.9% year-on-
year in the third quarter, in line with the consensus estimate.
Manufacturing activity remained a key driver of the economic
rebound and in December, the PMI Manufacturing index beat the
consensus estimate, rising to 57.0 against 55.3 in the preceding
month.
• There were also encouraging improvements in consumer
activity. Retail sales rose by 1.8% year-on-year in October,
well ahead of market expectations, while household
consumption climbed by 0.3% quarter-on-quarter in the third
quarter, above both the consensus forecast and the reading in
second quarter.
• That said, the region’s solid performance continued to be
driven by the larger economies of France and Germany. In
the peripheral eurozone countries, the economic outlook is
less encouraging, as respective fiscal issues remained a major
concern.
• In early December, credit agency Fitch downgraded Ireland’s
debt rating by three notches from ‘A+’ to ‘BBB+’. Tensions
also grew around Spain, as the nation’s industrial output growth
deteriorated sharply (-3.8% year-on-year) and the number of
unemployed rose by 24,000 in November.
UK
Manufacturing activity continues to lead the recovery, while the activity
in other sectors was mixed.
• The UK’s PMI Manufacturing index jumped from 57.5 in
November to 58.0 in December, a 16-year high for the survey
and indicative of a robust increase in activity. Also, according
to the latest GDP report, the UK economy continued to grow
in the third quarter at 2.7% year-on-year, a positive reading,
albeit lower than the consensus estimate.
• In the consumer sector, retail sales were stronger-than-
expected in November, rising by 1.8% year-on-year, against
consensus expectations of 1.4% year-on-year. However,
consumer confidence declined to 45 in November, well below
the consensus estimate, amid disappointing labour data and the
government budget squeeze.
• Indeed, the government tightening is targeting fiscal
consolidation of GBP111 billion by 2015, while the
unemployment rate is high, at 7.9% in October. Furthermore,
jobless claims failed to provide positive momentum in labour
markets.
• Inflation remained unusually strong relative to other developed
markets. The core Consumer Price Index rose by 2.7% year-
on-year in November, while the all-items Consumer Price Index
came in at 3.3% year-on-year, more than expected by the
consensus
7
Macro Assessment

Japan

Economic releases were generally mixed, but the broad picture remained
positive overall.

• On the positive side, GDP growth reached 1.1% quarter-on-

quarter in the third quarter, beating the consensus estimate of
1.0%, while October’s industrial production rose by 5.8% year-
on-year in November, exceeding both the consensus estimate
and the previous reading.

• Another bright spot came from the third quarter corporate

survey, which showed capital expenditure rising for the first
time in three years. Also, in an attempt to boost the nation’s
recovery, Prime Minister Naoto Kan intends to cut the corporate
tax rate by 5 percentage points.

• However, the fourth quarter Tankan Survey showed a

marginally negative reading for both the large manufacturing and
the non-manufacturing outlook, which underscored the likelihood
for economic activity to moderate in the fourth quarter.

• In the consumer sector, readings were still on the weak side.

Consumer confidence was 40.6 in November, down from 41.1
in October, while labour cash earnings fell by 0.2% year-on-
year in November, well below the consensus estimate of 0.6%
year-on-year.

• Reinforcing the concern over weak consumer activity, the core

CPI year-on-year rate declined to -0.9% against an estimate
of -0.8% by the consensus. The all-items Consumer Price
Index year-on-year rate also declined, from 0.2% to 0.1% in
November but at least remained positive.

Emerging Markets

Economic activity remained solid in emerging market countries, but

combined with increasing inflation rates, there is potential for more
monetary tightening.

• PMI indices came in above 50 for many emerging market

countries, indicating that the expansion in manufacturing
remained strong.

• In the consumer sector, retail sales growth was strong, rising

to 18.7% year-on-year in China in November and remaining
robust in the other major emerging market economies, albeit
moderating from previous peaks.

• However, a moderation in economic activity was more evident

in December. In Brazil, while economic growth remained strong
in third quarter, the reading was below the levels seen in
previous quarters. The same now applies to South Korea and
many other emerging market countries.

8
Macro Assessment

• Also, while they remained strong on an absolute basis, year-

on-year growth rates for exports and industrial production
continued to trend lower for several countries.

• Emerging market inflation generally intensified in December. In

China, November inflation accelerated to 5.1% year-on-year
from 4.4% a month earlier, potentially prompting China to tighten
more aggressively. Also, while food inflation continued to be a
major driver of price movements (up by 11.7% year-on-year in
November), non-food sectors have shown stronger increases.

9
Equity Markets
Global Developed Markets
• We have a neutral view on equity markets relative to cash.
• This view is underpinned by a moderation in 2011 earnings
growth expectations. The more moderate forecasts mean that
the risk of negative surprises is not as elevated as before.
• Another reason for our neutral view is attractive relative
valuations especially versus government debt. Furthermore,
commitments by central banks to inject more liquidity into
markets if needed to support growth have improved the outlook
for equities somewhat.
• At the sector level, we have closed out our preference for
healthcare, telecommunications and consumer staples stocks
as the valuation gap relative to other sectors has converged
making these sectors less attractive on a relative basis.
US
• The US macroeconomic picture was encouraging in December,
supporting our central scenario of positive growth in 2011.
• US company earnings growth estimates for 2011 rose
marginally in December to 13.7%. That said, the weakness in
consumption and employment still warrants some caution.
• From a valuation perspective, US equities are trading at a 12
month forward price / earnings ratio of 13.3x. This is higher
than the level seen in November but still in attractive territory
compared to history. Furthermore, with the Fed keeping rates
low and continuing its quantitative easing programme, liquidity is
likely to remain a positive factor for US (and other) equities.
• Therefore, balancing the ongoing risks to economic growth, the
moderately attractive valuations and the favourable levels of
liquidity, we retain our neutral positioning in US equities versus
cash.
• At the sector level, while valuations remain attractive for
healthcare and telecommunications stocks on an absolute basis,
the valuation gap relative to other sectors is less compelling.
Therefore, we no longer have a relative preference for these
two sectors.
Europe
• Labour market data remains weak, but other economic activity
has improved and is positive in both the UK and eurozone,
supporting our view of moderate growth in 2011. However,
concerns over the debt situation and risks of contagion are
ongoing.
• From a valuation perspective, eurozone and UK equities are
trading at reasonably undemanding levels, with their 12-month
forward price / earnings ratios at 10.6x and 10.4x respectively.
• In addition, as the European Central Bank and the Bank of England
are likely to leave their interest rates unchanged for some time,
we expect ongoing liquidity to be supportive.
• Overall, we maintain a neutral position in equities versus cash in
recognition of the balance of the various factors aforementioned
and the risks.
Japan
• The Japanese economic recovery is expected to slow and the
government is trying various ways to spur inflation and employment
to foster a more sustainable growth path. The corporate tax reduction
proposal has been passed by the cabinet and is awaiting approval
from parliament. This contributes to our positive outlook on Japanese
equities.
• 2011 estimated earnings growth for Japanese stocks is still reasonably
healthy (12.8% as at end December). While the ongoing strength of the
yen might be cited as a negative factor, companies’ export earnings
have shown remarkable resilience to a stronger currency.
• In terms of valuations, Japanese equities appear inexpensive, as both
trailing and forward price / earnings ratios are still below their historic
peaks.
• Based on attractive valuations and expected positive price momentum,
we have taken a tactical short-term overweight position in Japanese
equities against other developed equity markets.
Global Emerging Markets
• Growth rates for emerging economies in 2011 continue to
look impressive compared to the developed world, providing
a favourable backdrop to emerging-market equities. Many
commodity prices are strong, which is a further positive factor in
many cases.
• Valuation measures for emerging equities are not giving strong
signals at present and neither are 2011 company earnings
estimates at extreme measures by historic standards. Both of
these factors are, therefore, neutral for investment implications
for the asset class overall.
10
Equity Markets

• Relative valuations within emerging markets equities have shifted tax on certain investments by foreigners from 2% to 6% in an
slightly. Valuations for Emerging Asia have improved, with the 12 effort to stem currency appreciation.
month price/ earnings ratio easing to 12.0x and now standing
only marginally higher than Latin America (11.6x). Middle East

• Elsewhere, Russian equities continue to look cheap. Their

• There have been macroeconomic improvements in the Middle
12-month forward price / earnings ratio stands at 6.2x - hence
East and North Africa (MENA) region. Qatar has cut its interest
our continued stance towards an overweight position.
rates while Dubai has stated it does not require the support of
• Inflation remains a key risk and a focus for 2011. its central bank anymore.

• Our emerging market equities view continues to be neutral
overall (versus cash) as the long-term backdrop to the asset
class remains favourable, but is balanced by the risks of slowing
economic growth in both the emerging and developed regions in
2011.
• Gross Domestic Product growth expectations are positive
for both 2010 and 2011, although there are downside risks.
Valuations remain undemanding but given the risks to economic
growth and the narrowing valuation discount to emerging
markets, we remain neutral on MENA versus other equity
markets.

Asia ex-Japan
Eastern Europe
• GDP growth across the region remained solid, but the potential
• We maintain our preference for Russian equities within the wider
for monetary tightening in key countries could moderate the
emerging markets universe, as we continue to think valuations
pace of improvement. Overall, we expect economic growth
are attractive on a relative basis.
to stay strong in 2011, a positive factor for the region’s equity
markets. • In Eastern Europe, CPI indices increased across the major
countries. However, given the outlook for domestic demand
• From a valuation perspective, Asia ex-Japan equities remain
in this part of the emerging markets world, the risk of policy
attractive, at a price / earnings ratio of 12.8. Earning growths
changes remains lower than in Asia and Latin America.
expectations for 2011 are also a positive factor particularly as
they are relatively undemanding compared to previous years.
• However, the momentum of economic growth will likely be
slower this year which, coupled with and higher interest rates in
2011, reduces the upside potential for Asian equities.
• While we are positive in the Asia ex-Japan region on reasonable
valuation and ample liquidity, we are cautious as to the level of
tightening central banks in Asia might put forth, thus we maintain
a neutral stance on the region.

Latin America

• The economic performance of Latin American countries remains

strong and earnings growth estimates for 2011 look more
reasonable.
• Having said that, the good news seems to be well reflected in
market prices and relative valuation measures show no strong
signals.
• Ongoing global flows from the developed to the emerging world,
fuelled by continued low interest rates in the developed world,
continue to present a problem to emerging economies.
• Brazil, the largest market in Latin America, has already raised the

11
Fixed Income

US dollar Government Bonds is in line with our central scenario of economic growth and is
typically positive for corporate bonds.
• The recent movements in US government yields continue
• In addition, corporate earnings remain supportive. 2011 earnings
to support our modestly cautious view on this segment of
growth expectations are a solid 14.7% at the end of December,
the fixed income asset class, amid a generally improving
a level that continues to reflect the current and expected
macroeconomic environment.
economic conditions.
• The latest quantitative easing programme is supportive of
• That said, while we expect credit spreads for investment grade
treasury prices, but as the recovery shows some progress,
bonds to continue their general tightening trend given their strong
the time for the start of normalisation in monetary policy is
fundamentals, this might not be enough to compensate for
approaching.
potential future increases in government bond yields.
• From a valuation perspective, although inflationary pressures
• Against this backdrop, we have retained a preference for
and inflation expectations remain muted, current yields are not
investment grade corporate bonds relative to government
particularly historically attractive. However, yields have risen
bonds.
somewhat in recent months and, therefore, valuation levels are
less stretched.
High Yield
• We continue to be a little cautious of US treasuries relative to
cash but less so than last month as yields have already risen • Among riskier asset classes, our tactical preference for high
in recent weeks. Within fixed-income assets, our preference yield corporate debt has continued to prove rewarding. Although
remains for corporate bonds, both investment and non- yield spreads against government bonds are tighter than earlier in
investment grade. 2010, valuations remain attractive.

• Furthermore, abundant liquidity conditions, coupled with

Eurozone Government Bonds accommodative monetary policy in developed economies,
gradually loosening lending standards and improving issuer
• The market has reacted positively to the announcement of
fundamentals, all point towards a supportive environment for the
extended liquidity measures. This may help yields to stay low
asset class.
and has been a positive factor for the asset class for some time.
• In particular, the low interest rate environment in developed
• However, the overriding mood in the financial markets is
economies continues to support the high yield market as
still volatile and uncertainties regarding the economic health
investors seek out higher yielding assets.
of eurozone peripheral countries remain, more particularly
surrounding the risk of some form of sovereign default. • Overall, we retain our positive view on the asset class.

• Although the bond markets of peripheral eurozone nations are

priced to compensate for some risk, the final solution to the
debt difficulties is not clear making it hard to evaluate whether
the pricing is sufficiently attractive.
• Therefore, against this backdrop, we maintain a somewhat
cautious outlook for eurozone government bonds against cash
although the recent increase in yields has mitigated this caution
to some extent. Overall, within fixed income, our preference
remains for corporate rather than sovereign debt.
Investment Grade Corporate
• While economic activity has improved in December, the data still
suggests that the recovery is fragile, as unemployment remains
high and consumer activity disappoints. This economic backdrop
Sovereign US dollar-denominated Emerging Markets
• In the low interest rate environment of the developed markets,
the higher yields offered by emerging market debt are appealing
and are likely to continue to attract interest.
• However, inflation is prompting many emerging economy central
banks to raise interest rates. Not only does it look like the rate
tightening cycles have further to go but also there is a clear risk
that rates will need to rise further than currently expected if
price pressures do not recede.
• Our investment outlook for this asset class has not changed
recently. We continue to prefer developed market corporate
debt to US dollar-denominated emerging market sovereign debt.
12
Fixed Income

Global Inflation-Linked Bonds

• In developed economies, inflation is expected to be relatively

contained in the near-term, as high unemployment and tighter
fiscal policies are likely to weigh on growth.

• On a relative basis, global inflation-linked bonds appear less

expensive, particularly in view of the considerable sell-off in
sovereign bonds.

• While we retain an underweight stance on inflation-linked bonds,

our view has turned less negative as the relative valuations
versus conventional government bonds have improved.

13
Other Investments
Oil
• Oil price appreciated to a two-year high in December, rising
from US$84.1/bbl at the end of November to US$91.4/bbl at
the end of December.
• Global crude oil demand continued to outpace the growth in
supply in November.
• The International Energy Agency revised up its 2010 and
2011 forecasts for global oil demand based on stronger-than-
expected readings from North America and emerging Asia.
• However, a forecast rise in OPEC production in 2011 is likely to
prevent prices from increasing dramatically.
• Balancing on one hand, the expected pick-up in demand
and on the other, the degree of spare capacity, we have
slightly increased our forecast price range from US$65-85 to
US$70-90.
Gold
• Actions by the US Federal Reserve are likely to continue to
provide liquidity and potentially weaken the USD further, both of
which are likely to drive commodity prices, including gold, higher.
• In addition, ongoing uncertainty surrounding the sustainability of
the economic recovery remains, adding to the attractiveness of
holding the metal.
Currency
• The debt situation of the peripheral European economies does
not look to be fully resolved and further periods of funding
difficulties, probably requiring intervention from the various
authorities, can be expected. Although our central view is not for
a break-up of the euro, either partial or full, further euro volatility
is likely.
• Although we can expect emerging countries to implement
further policy responses to try to limit inflows (probably a
• However, some factors remain unsupportive, like the threat of
higher interest rates outside the US, as has been the case in
some developing economies.
Commercial Real Estate (unlisted)
• The UK remains our preferred market over the medium-to-
long-term due to the yield level which, although lower than
last summer, sufficiently prices in the weak occupier market.
However, we expect a dip in performance in the short-term.
• Asia Pacific has the strongest rental growth prospects,
particularly in the short-term, although recent strong capital
value growth has reduced yields to an unattractive level, with
the potential for a correction in values over the medium-to-
long-term.
• In the US, despite weak occupier markets, pricing for prime
assets in top-tier markets, such as New York and Washington
D.C., has increased rapidly, and cap rates are back to pre-
crisis levels. This has reduced their relative attractiveness.
However, there are significant regional differences, and pricing
for other segments of the market remains subdued. Selected
opportunities may appear as demand broadens from its current
narrow focus.
• In the eurozone, capital values generally remain expensive on a
relative basis, and other regions potentially offer better value.
However, there are significant country level and local variations
within the region, and we expect stock specific opportunities to
emerge.
combination of interest rate rises and other measures such as
capital controls) in 2011 with the potential for at least short-
term market reaction, the better growth rates in the emerging
regions are likely to underpin their currencies in the long-term.
• Our currency views have not changed this month. We do
not have high conviction in any tactical currency views and,
therefore, have a neutral view.
14
 Managing risk exposure using diversification
Example of diversification strategies in the model portfolio (*)

Example: Portfolio I Example: Portfolio II Example: Portfolio III Example: Portfolio IV Example: Portfolio V

Lower Higher
risk risk

Cash Fixed Income Alternative Equity

Liquidity Global Aggregate Bonds Property US Equity Asia Pac. ex Japan Equity
Global High Yield Bonds Commodity Europe Equity Emerging Markets Equity
Emerging Markets Debt Private Equity Japan Equity Russia
Hedge Fund
Absolute Return

Source: HSBC Global Asset Management, November 29th 2010. Past performance does not guarantee future results. (*) For illustration purpose only. The present document and the information
provided do not constitute a proposal or advice for the acquisition or sale of investment products. HSBC Bank Plc does not provide investments advice with the present document, does not accept
any obligation and will not accept any responsibility for any consequences from any investment decision based on the present document.

15
Disclaimer

The views expressed are those of HSBC Global Asset Management and do not constitute investment advice. No liability is accepted to recipients acting
independently on its contents. Past performance should not be seen as an indication of future returns. The value of investments and any income from them can
go down as well as up.

The present document and the information provided do not constitute a proposal or advice for the acquisition or sale of investment products. HSBC Bank Plc
does not provide investments advice with the present document, does not accept any obligation and will not accept any responsibility for any consequences
from any investment decision based on the present document.

Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for
any failure to meet such forecast, projection or target.